When considering what is required for a guarantee to be legally enforceable, it is vital to understand the formalities and principles that underpin the enforceability of guarantees.
In Bioconstruct GmbH v Winspear and another [2020] EWHC 7 (QB), the High Court considered whether a guarantee was validly executed as a deed. Although this case was decided five years ago, it remains a useful reminder of the importance of strict compliance with execution requirements.
The claimant pursued unpaid sums allegedly due under a guarantee, but the Court dismissed the claim, holding that the guarantee had not been validly executed as a deed because pre-signed signature pages were attached after material amendments had been made. In essence, the claimant attempted to create a legally binding deed where none existed.
This case continues to serve as a practical guide on enforceability and illustrates the formal requirements and legal principles governing personal guarantees.
What is a guarantee?
A guarantee is a contract by which a guarantor or a person agrees to be responsible for the obligations of a third party if that party fails to perform. The Statute of Frauds 1677 provides that a guarantee must be in writing and signed by the guarantor to be enforceable.
If a guarantee is drafted as a contract rather than a deed, consideration must be shown (for example, “in consideration of the lender providing credit to the borrower” or “in consideration of paying back a loan”). To avoid potential disputes over consideration, many parties prefer to execute the document as a deed. However, when executed as a deed, the formal requirements are stricter and must be rigidly observed.
What is required for a guarantee to be legally enforceable?
For a guarantee executed as a deed to be legally enforceable, it must be validly executed as a deed and signed by the guarantor in accordance with legal requirements. As confirmed in Bioconstruct GmbH v Winspear, attaching pre-signed pages or signatures from earlier drafts will not constitute proper execution. Failure to meet these requirements could render the guarantee unenforceable.
Even where execution formalities are defective, the beneficiary may still rely on an indemnity clause, subject to the drafting, as indemnities do not require the same formalities as guarantees.
In addition to issues with execution, there are other situations where a guarantee may be rendered unenforceable.
A guarantee can become unenforceable if the creditor’s conduct amounts to a waiver or “indulgence.” For example, if the creditor gives the principal debtor additional time to pay, varies repayment terms, or otherwise delays enforcement without the guarantor’s consent, the guarantor may be discharged from liability.
This is because the guarantor’s obligation is secondary to that of the principal debtor, and the creditor’s indulgence may alter the risk the guarantor originally undertook.
Similarly, if there is a material change to the underlying contract or the obligations guaranteed without the guarantor’s knowledge or consent, the guarantee may no longer be enforceable.
Courts have held that where the underlying agreement is varied in a way that increases or changes the guarantor’s exposure, the guarantee is discharged unless the guarantor agreed to the variation in advance or the guarantee expressly permits such changes.
Guarantees vs. Indemnities
Understanding the distinction between guarantees and indemnities is essential for assessing enforceability.
A guarantee is a secondary obligation that secures the primary obligations of another party, such as paying back a loan. The guarantee becomes enforceable only when the third party defaults on one or more of the guaranteed obligations.
By contrast, an indemnity creates primary obligations that are contractual promises to cover another party’s losses. Unlike guarantees, indemnities exist independently of the underlying transaction and may remain enforceable even if the principal debtor’s obligations are discharged.
This distinction matters because guarantees are more susceptible to legal challenges such as undue influence or failures in execution. However, indemnities generally offer stronger protection for the beneficiary. To mitigate risk, many commercial agreements include both guarantee and indemnity provisions.
Ensuring a guarantee is legally enforceable
Determining what is required for a guarantee to be legally enforceable depends on both its form and execution. Parties entering into guarantees should ensure that:
- The document complies with all statutory and formal requirements.
- The guarantor signs the document correctly, and the execution is valid.
- The guarantor’s consent is obtained freely and without undue influence.
- Any amendments or variations are properly documented and agreed to by all parties.
Disputes about execution or enforceability often arise only when a guarantee is called upon. This is typically when the guarantor cannot fulfil the guaranteed obligations. Ensuring compliance from the outset can therefore prevent costly litigation.
How can AFG Law assist?
Whether you are providing or receiving a guarantee, understanding the enforceability of guarantees and the distinction between guarantees and indemnities is crucial. A guarantee must be carefully drafted, properly executed, and supported by the necessary formalities to create a legally binding and enforceable obligation.
If you or your company require further advice on guarantees, or assistance ensuring that your guarantee is legally binding, our Dispute Resolution Team can provide tailored advice and guidance.